Dow Drops 53, Nasdaq Ends Down 7

Stocks gave up a big early advance to finish moderately lower Wednesday after the Federal Reserve reduced its economic outlook for 2009 and bank stocks sank.

May 20, 2009 5:01 EDT by Tim Paradis

NEW YORK (AP) — Stocks gave up a big early advance to finish moderately lower Wednesday after the Federal Reserve reduced its economic outlook for 2009 and bank stocks fell.

The central bank said it expects some business conditions to improve in coming months, but it also lowered its assessment of the economy for the full year and said unemployment could reach nearly 10 percent.

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“They’re saying the recovery itself may not be as robust as what people are talking about,” said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. “They’re saying that the unemployment rate is going to be above where they initially forecast it.”

Stocks had been fluctuating throughout much of the afternoon Wednesday as rising commodity prices drove energy and material stocks higher, while bank stocks gave up early gains.

Energy stocks posted some of the biggest gains after oil topped $62 a barrel for the first time since November. But financials turned lower after enthusiasm about Bank of America Corp.’s ability to raise billions of dollars by selling stock couldn’t erase fears that banks are still a long way from scrubbing all the stains off their balance sheets.

“There is some uncertainty about the financials as a sector and people are a little bit leery about getting too involved with them,” said Doreen Mogavero, president of Mogavero, Lee & Co. in New York.

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According to preliminary calculations, the Dow Jones industrials fell 52.81, or 0.6 percent, to 8,422.04. The blue chips had been up as much as 117 points in early trading. The Standard & Poor’s 500 index slipped 4.66, or 0.5 percent, to 903.47, and the Nasdaq composite index fell 6.70, or 0.4 percent, to 1,727.84.

Still, Bank of America shares rose in response to news that it raised $13.5 billion through the sale of 1.25 billion shares. The stock sale puts the bank more than halfway toward raising the $33.9 billion in capital the government is requiring as a result of its stress test of 19 big banks.

Getting banks on a more stable footing could boost lending and help create a sustained recovery. Analysts said it is a welcome sign of stability in the stock market that banks have been able to raise capital by selling stock.

“If you talked about doing that in December it would not have been available. There wouldn’t have been any capital from investors,” said Fred Fraenkel, vice chairman of Beacon Trust Co.

Bank of America rose 24 cents, or 2.1 percent, to close at $11.49, but other financials faltered. Regions Financial dropped 35 cents, or 6.7 percent, to $4.89; JPMorgan Chase & Co. fell $1.26, or 3.5 percent, to $34.55; and Citigroup Inc. lost 8 cents, or 2.1 percent, to $3.69.

Light, sweet crude advanced $1.94 to $62.04 a barrel on the New York Mercantile Exchange after a government report showed a drop in U.S. oil supplies for the second straight week.

Stocks ended mixed Tuesday after a record low in housing construction stirred unease about the economy’s direction. Despite back-to-back dips on Tuesday and Wednesday, the S&P 500 index is still up 33.5 percent since March 9.

Investors have set aside some of their biggest worries about the economy sliding into a deep depression, but many are worried that the market has risen too high too fast and could easily contract in the absence of more evidence that the economy is healing.

“Just as markets sometimes go too far on the negative in the short-term, they can go too far in the positive,” said Subodh Kumar, an independent investment strategist in Toronto. “I think right now the markets will have trouble keeping momentum.”

Investors need to see actual economic and earnings growth, as opposed to a moderating decline, he said.

In other trading, the Russell 2000 index of smaller companies fell 3.91, or 0.8 percent, to 489.35.

Advancing issues narrowly outnumbered decliners on the New York Stock Exchange, where volume came to 1.65 billion shares.

Bond prices jumped after the Fed minutes indicated the central bank could buy more government debt. That pushed the yield on the benchmark 10-year Treasury note down to 3.18 percent from 3.25 percent late Tuesday.

The dollar plunged against the euro and the British pound, while gold prices rose.